By: Hampton Pearson
On paper, 35% corporate tax rate is highest in industrialized world
With loopholes and subsidies, effective rate closer to 12%
Expect onslaught of lobbyists as Congress debates reform
The American corporate tax system is a paradox. On paper, the 35% corporate tax rate is the highest in the industrialized world. Yet in reality, due to loopholes in the tax code and federal subsidies, the effective tax rate is much closer to 12%.
This disconnect has attracted a lot of attention. Those interested in fundamental tax reform see this as an opportunity to fix a broken system, while others see a political opportunity to close some loopholes and raise tax revenue for deficit and budget battles.
Comprehensive corporate tax reform sounds good politically, but is difficult to do in practice. Congress’ top tax writers, Republican Rep. David Camp, the House Ways and Means Committee chairman, and Democrat Sen. Max Baucus, the Finance Committee chairman, are pushing ahead with tax reform, despite odds against action this year.
Their ability to ink a deal is difficult because the corporate breaks that cost the Treasury Department the most money are very profitable (and popular) for American corporations. It is this profit paradox that raises the brows of policy wonks. The government collects in corporate taxes just 1.6% of gross domestic product, according to the latest Congressional Budget Office estimates. The average for developed countries is 2.8%. In the House alone, there are 11 bipartisan working groups aimed at a tax code overhaul.
The nonpartisan Congressional Research Service said corporate tax breaks cost the Treasury $158 billion dollars in 2011.
The three biggest breaks save manufacturers $52 billion dollars a year in equipment depreciation and an additional $9 billion in manufacturing credits, while multinational firms save $15 billion dollars a year deferring overseas profits.
If a long-term, comprehensive, tax reform effort is going to fall short, it will leave the door open to politicians who see smaller “loophole closures” as a prime place to generate revenue for this year’s deficit and budget battles. These smaller breaks are the most likely to disappear in 2013.
This month, President Obama has been back on the warpath talking about ending the special depreciation tax break for corporate jet owners, even when pressed about the possible loss of aviation industry jobs in Kansas.
On Super Bowl Sunday and in his State of the Union address, the president talked about taxing carried interest as ordinary income instead of at the capital gains rate. The change could generate about $2 billion in year in new revenue . . . in an era of trillion-dollar-a-year deficits.
Those breaks are part of a White House plan to simplify the tax code that also calls for: Eliminating oil and gas tax preferences including depletion allowances; ending what’s known as “last-in-first out” accounting, which rewards companies for inventory management; and changing the way some companies use insurance industry products as tax shelters.
In a clear sign of just how hard it is to take away corporate tax breaks, however, the recent tax deal to avoid the “fiscal cliff” included $54 billion in additional tax breaks for Corporate America.
Handicapping what corporate tax provisions survive is complicated by the ongoing budget battles. Sequestration is just days away. The resolution funding the government expires at the end of the month. And this spring another battle over raising the debt ceiling is waiting in the wings.
The one “sure thing” will be the onslaught of lobbyists: Tax reform is the de facto full employment act for the K-Street crowd.
A Valentine’s Day hearing before the House Ways and Means Committee — where all tax legislation originates — produced about 40 witnesses asking lawmakers not to change the tax writeoff for charitable deductions.